Reform for Japan's post office?

There is talk of reining in Japan's largest and most powerful financial
institution EVER since his days as a young, wide-eyed politician, Junichiro Koizumi has
wanted to privatise Japan's powerful post office. He came closer to his goal
when he was elected prime minister in April. One of his first acts was to set
up an advisory panel, stuffed with pro-reformers, to look at post-office
reform. The panel, which met for the first time this month, is already
demanding that the government-run postal savings system disclose all sorts of
figures, including the true extent of its unrealised profits and losses. Yet change will not be easy. With ¥255 trillion ($2.1 trillion) of deposits,
Japan's postal savings system is the biggest financial institution in the
world. When prodded, it flexes political muscle through its huge branch
network, whose employees are staunch supporters of the ruling Liberal
Democratic Party. To be fair, the post office has been reformed a little in recent years. Its
funds, which traditionally provided the government with a "shadow" budget, no
longer fill the coffers of the finance ministry. In 2003, the post office will
be turned into an "independent" public company. Afterwards, if Mr Koizumi gets
his way, it might even be privatised. This would represent "the most
significant and difficult structural change in Japanese finance" since the
second world war, argues Thomas Cargill, professor of economics at the
University of Nevada, and Naoyuki Yoshino, professor of economics at Keio
University in Tokyo, in a recent paper on the postal savings system. Further post-office reform could boost Japan's ailing financial system in
several ways. Postal savings accounts make up 35% of all household deposits,
nearly as much as all deposits in commercial banks put together. The postal
insurance business has ¥117 trillion in policies, and controls more than a
third of the country's life-insurance market. Traditionally, the government has
been able to pour much of this money into its own programmes, such as
state-housing loans or inefficient public-works projects. It has invested most
of the remainder in government bonds. Critics argue that this has prevented
money from flowing into higher-yielding assets, such as equities or venture
start-ups, in a way that would help the economy to grow. Competitors of the post office also want to be able to compete on even terms.
For years, bankers have resented the perks that the postal savings system
enjoys. It pays no taxes. Its deposits are guaranteed by the government, an
attraction to depositors worried about the state of the banking system. For
now, the banks also have a government-guaranteed safety net. But this will be
withdrawn next April. Meanwhile, banks pay a premium for deposit insurance,
while the post office gets it free. Without having to worry about profitability, the post office has come up with
products that private-sector rivals cannot hope to match: more flexible deposit
accounts with higher rates of interest, for instance. Life-insurance companies
have also suffered. They argue that the post office started to raise rates of
return on its policies in the 1980s, forcing the insurers to follow suit. The
burden of these high payouts has already led several life insurers to go bust,
and has left the rest greatly weakened. The post office has also been able to cross-sell its three main products
(postal services, savings and insurance), unlike banks and insurance companies,
which are prohibited from entering each other's businesses. It enjoys greater
freedom from inspectors and regulators, since, as a government agency, it does
not fall under the thumb of the Financial Services Agency. What is more, the
post office has no external auditors to check its accounts. Rather, these are
examined by bureaucrats in the Ministry of Public Management, Home Affairs,
Posts and Telecommunications (MPHPT), to which the postal savings agency also
happens to belong. Banks and insurers have long argued that the post office was never meant to
compete with the private sector. It was set up in 1875 to offer small-lot
deposits and insurance policies that were not offered by banks or insurers at
the time. Now, nearly half of the retail banks' deposits are defined as small,
as are nearly three-quarters of life-insurance policies. Although the 24,700
post offices across the country do indeed serve people in areas where there are
no banks, Mr Cargill suggests that the post office could rent out these
facilities to retail banks, so earning a fee-based income. Whether any of these mooted changes will happen in 2003 is unclear. The signs
are not promising. Bankers are worried that reforms could end up sharpening the
post office's competitive edge, by letting it participate in areas from which
it is currently excluded. Meanwhile, the MPHPT insists on drawing up the reform
legislation behind closed doors. Banks and insurers have repeatedly asked to
take part in the process, but so far the ministry has not let them. For now, reformers hope that Mr Koizumi will ensure that the postal savings
system will eventually be deregulated. But with so many interests dug in, the
prime minister and his supporters face a huge battle to dismantle the most
powerful financial institution in the country.
THE ECONOMIST, 23rd June 2001